FirstClearing

An affiliate of Wells Fargo & Company

February 3, 2011

Office of Regulations and Interpretations

Employee Benefits Securities Administration

Attn: Definition of Fiduciary Proposed Rule, Room N-5655
U. S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Re: Definition of Fiduciary Proposed Rule
Ladies and Gentlemen,

First Clearing, LLC ("First Clearing") appreciates the opportunity to provide comments to the
Department of Labor (the “Department”) on the proposed regulation, published on October 22, 2010,
which would substantially amend the current and longstanding regulatory interpretation of fiduciary
status under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). First
Clearing, an affiliate of Wells Fargo & Company, provides securities-execution and brokerage-clearance
services to Wells Fargo Advisors, LLC, Wells Fargo Advisors Financial Network, LLC, H.D. Vest
Investment Securities, Inc, and over 100 non-affiliated retail securities firms throughout the United
States. Although First Clearing is included within the Wells Fargo & Company comment letter to the
Department, we are forwarding this supplemental letter in order to provide greater specificity as to the
unique attributes governing a clearing firm.

In the proposed rule, the Department expands the interpretation of fiduciary status under Section
3(21)(A) of ERISA by redefining the activities that constitute the provision of “investment advice for a
fee or other compensation.” We understand that the Department hopes thereby to reach individuals and
entities that it believes should appropriately be held liable as fiduciaries, either for activities or guidance
that reasonably appears to the client to be fiduciary in nature or for activities that are in and of
themselves fiduciary in scope. However, the proposed regulation as it is currently drafted will
significantly impact broker-dealers who act as clearing firms in ways that are not within the scope of the
change’s intent.

One North Jefferson
St. Louis, MO 63103
firstclearing.com

First Clearing, LLC is a registered broker-dealer and a non-bank affiliate of Wells Fargo & Company, member NYSE/SIPC.


The proposed regulation includes in “investment advice” the provision of advice or an appraisal or
fairness opinion concerning the value of securities or other property.' It goes on to exclude from these
activities “the preparation of a general report or statement that merely reflects the value of an investment
of a plan or a participant or beneficiary, provided for purposes of compliance with the reporting and
disclosure requirements of the Act [ERISA], the Internal Revenue Code, and the regulations, forms and
schedules issued thereunder, unless such report involves assets for which there is not a generally
recognized market and serves as a basis on which a plan may make distributions to plan participants and
beneficiaries.””

Unfortunately, the exclusion does not address the other legal and regulatory requirements
that may cause a service provider to provide a general report or statement. As a clearing institution,
First Clearing provides clearing services to retail and institutional accounts through an introducing
broker. The introducing broker is the party who works directly with the retail client. Introducing
brokers have a variety of responsibilities related to the opening and approving of brokerage accounts,
including the responsibility for making recommendations and determining the suitability of specific
investment strategies, as well as maintaining the client relationship. The clearing firm’s responsibility is
more limited, in that the clearing firm does not provide any advisory services to the client nor does it
generally have direct contact with the client. However, the clearing firm is responsible for the
safekeeping of money, funds, and securities and is tasked with the delivery of a confirmation for each
transaction of an introduced account. Under NASD Rule 2430, it is also responsible for providing at
least one quarterly summary of account status (an account statement). Such statements are subject to
numerous format and content requirements. Since these required statements are not different in nature
from statements that may be provided for ERISA or Internal Revenue Code, we request that the
Department remove the limitation that only general reports or statements provided for purposes of
compliance with ERISA or the Internal Revenue Code are exempt.

In addition to the expansion of the types of general reports and statements covered by the
exclusion, we suggest that the limitations on the exclusion be removed. In many instances, clearing
broker-dealers are required to provide valuations that are not derived from an exchange or an active
market. As disclosed to the client, securities prices reflected on client statements may not reflect values
derived from a “generally recognized market” when securities are thinly-traded or are illiquid. In those
instances, clearing broker-dealers typically rely on outside quotation services, computerized pricing
services, or on methodology based on the most recent “bid-price” or last reported transactions. As an
example, certificate of deposits (“CD’s”) purchased by clients of broker-dealers are usually priced by a
pricing service vendor. For other investments, the investment’s value is determined by a third party. A
hedge fund’s values, for instance, are determined by the hedge fund manager and it is the hedge fund
manager’s valuation that is reported on the statement. In certain cases, such as for limited partnership
holdings or other hard-to-value assets, the client may direct the clearing broker-dealer to accept
valuations from a third party,

' Proposed §2510.3-21(c)(1)(i)(A)C)
2 Proposed §2510.3-21(c)(2)(iii)


In non-market pricing situations, securities prices are provided as estimated valuations.
Statement disclosures alert clients that they may not be able to buy or sell an investment based on the
estimated statement value. For example, NASD Rule 2340 makes clear that if an account statement
provides an estimated value for a Direct Participation Program (DPP) or Real Estate Investment Trust
(REIT) security, it must include a brief description of the estimated value, its source, and the method by
which it was developed, as well as a disclosure that DPP or REIT securities are generally illiquid, and
that the estimated value may not be realized when the investor seeks to liquidate the security. Since the
provision of estimated values or values received from a source other than an exchange is required but
administrative in nature, we believe that the provision of non-market valuations on other statements and
reports required through other regulation should not be considered fiduciary activity.

Absent greater clarity and a broader exclusion for general statements and reports required by
other regulatory authority, we are concerned that IRA custodians and other parties who provide
investment account services for IRAs and ERISA-covered plans may substantially limit the investments
that IRAs and ERISA-covered plans may hold in their accounts. While certain investments may not be
valued in a manner consistent with the Department’s concept of a “generally recognized market”, they
can be valuable additions to a plan or IRA’s investment portfolio, providing additional protections (in
the case of CDs) or a means for balancing market exposure. We are also concerned about the, possibly
unintended, impact of the proposed regulation on pricing and quotation services vendors, who may
choose to cease certain pricing services or substantially change the cost in light of potential liability
under the proposed regulation. We strongly urge the Department when drafting the new regulation to
consider the full range of investments available and the way in which such investments are typically
valued, and to broaden the exclusion for statements and reports.

We hope these comments have been helpful and we hope that the Department will consider them
while determining the proposed regulation’s scope and form.

Sincerely,

[vy nt hos »
Atul Kamra
President

First Clearing Correspondent Services